Despite attempts to budget and save in a prudent manner, certain mistakes such as marrying the wrong person or failing in business can lead even people with good financial knowledge down the path of bankruptcy.
Insolvency statistics (comprising consumers and businesses) for Canada in 2011 showed a decrease of 8.9% (year-over-year) including bankruptcies and proposals. Despite the reduction in insolvency numbers, it is still a concern but there are formal ways to avoid having to file for bankruptcy, if it is too late for the classic advice from PF blogs.
Consolidation Order/Voluntary Deposit Service
To assist residents of Alberta, Saskatchewan, and Nova Scotia who are in dire financial states, there is a legal proceeding known as a Consolidation Order (or Orderly Payment of Debt program). This voluntary proceeding allows the resident to obtain an order from the provincial court to combine all their debts into a single one and then make payments to the court on a periodic basis.
The amount to be paid is determined by the court based on the resident’s capability to repay and it also ensures distribution of these payments to creditors on the resident’s behalf. Quebec residents have the Justice Québec’s Voluntary Deposit Service, which is similar to a Consolidation Order as explained above.
For individuals with total debt less than $250,000 (excluding debts secured by their principal residence), a consumer proposal offers respite. This procedure allows the individual to work with a trustee and come up with a plan to pay their creditors. The proposed plan could be one where the individual pays a certain percentage of the actual amount owed over a defined time period, extends the time available to pay off the debt, or uses a combination of the two options.
As might be evident, the trustee plays the role that the court would in a Consolidation Order, i.e., payments are made through the trustee who ensures that they reach the creditors. A consumer proposal helps the individual to obtain a stay order against proceedings initiated by unsecured creditors and keep their assets while resolving their issues.
Division I Proposal
Unlike a consumer proposal which is available only to individuals, a Division I proposal is a formal procedure available to individuals and businesses and there is no limit placed on the total debt amount. The procedure for a Division I proposal is the same as a consumer proposal, i.e., the debtor works with a trustee and offers a plan to pay the debt and the trustee ensures that the payments collected reach the creditors. The benefits of a Division I proposal are the same as a consumer proposal.
The Companies’ Creditors Arrangement Act
The Companies’ Creditors Arrangement Act (CCAA) is a federal law that offers insolvent companies owing more than $5 million to reorganize their business and sort out their financial disarray. Under the CCAA, companies seek protection from the court, while they create a payment plan for creditors (known as a Plan of Compromise or a Plan of Arrangement).
The advantages of this arrangement include the continued operation of the business and protection from creditors while the Plan of Compromise is prepared. However, creditors will get their chance to vote and decide whether the extended offer as part of the plan is acceptable or not. The Office of the Superintendent of Bankruptcy Canada maintains a CCAA database, which allows the public to search for corporations using (or that have used) this option.
If none of the above options are feasible or have failed, then declaring bankruptcy is the last resort to get out of the financial quagmire.
Do you know more about any of these alternatives to bankruptcy (first-hand or otherwise)? If so, please leave your insightful thoughts in the comments section.
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.